Following a Record Spike, Will the PSE’s Broader Market Stage a 4-5 Week Relief Rally?

Following a Record Spike, Will the PSE’s Broader Market Stage a 4-5 Week Relief Rally?

 

Global central banks have concertedly been pushing unprecedented amounts of liquidity by aggressively expanding their balance sheets, as part of the many measures to stabilize the financial system.

Instead, speculative excess and market dislocation resulted in a melt-up of equities that have become detached with actions on the ground. Retail manic buying has incited a pure price multiple expansion in the US. The S&P 500 rocketed 4.91% this week, which added to a three week gain of 11.53% to explode its forward PE ratio to multi-decade highs!

Meanwhile, raging rallies have fired a spectacular 10.73% weekly gain of the 5-issue dominant main local equity index, the PhiSYx, which bested the region.

 

Not only has this week’s spike been the fourth-best weekly performance since 2007, but the 16.72% two-consecutive week surge represents the steepest advance since the last half of August 2007’s 16.67%. The August 2007 rally recovered all its losses but sputtered from then in October.

The index lost 55% in about a year.

Importantly, last week’s advancers set a fresh record high margin of 312 over decliners.

Seen from a nearer time framework, the recent gyrations, which have been historic by scale, may have highlighted the extensive oversold conditions or the interim bottom of the broader market.

The margin of decliners over advancers likewise hit a record last March or during the selling climax underscoring the pronounced volatility afflicting the market.

The largest margin spread of over 200s occurred in the January’s of 2016 and 2017, which emerged in response to sharp selloffs and where the broader market rally extended to the next five weeks or so before yielding to exhaustion.

Will history rhyme?

Aside from the big margin spreads in favor of buyers, the second-best two-week advance in August 2007 had also been in reaction to a selloff.

In the current setting, however, the record two-week returns and extreme bullishness of market internals (advance decline spread) have signified the second leg of the bear market rally.

Nevertheless, the peso volume will remain the key to a sustainable broad-based relief rally.

The bounce-off the March 2020 low was driven primarily by locals even as volume and foreign participation diminished. Foreign money were net sellers back then.

The ambiance radically changed in the last two weeks as volume jumped, whereas foreign money flows turned positive last week. But foreign participation as a share of total trade diminished anew.

 

Again, the broadening rally represents the positive part of this central bank inspired gamble.

The negative aspect is that retail players may have become energized to propel higher the number of daily trades.

If history rhymes, we may see a broad market rally in the next 4-5 weeks.

Trade accordingly and cautiously.